Problem 19-1A Midlands Inc. had a bad year in 2016. For the first time in its hi
ID: 2562310 • Letter: P
Question
Problem 19-1A Midlands Inc. had a bad year in 2016. For the first time in its history, it operated at a loss. The company's income statement showed the following results from selling 78,000 units of product: net sales $1,950,000; total costs and expenses $1,790,000; and net loss $-160,000. Costs and expenses consisted of the following Total Variable Fixed Cost of goods sold Selling expenses Administrative expenses $1,126,000 517,000 147,000 $1,790,000 $635,000 90,000 55,000 $780,000 $491,000 427,000 92,000 $1,010,000 Management is considering the following independent alives for 2017 I. Increase unit selling price 30% with no change in costs and expenses 2. Change the compensation of salespersons from fixed annual salaries totaling $201,000 to total salaries of $39,000 plus a 5% commission on net sales. 3. Purchase new high-tech factory machinery that will change the proportion between variable and fixed cost of goods sold to 50:50 (a) Compute the break-even point in dollars for 2017. (Round contribution margin ratio to 2 decimal places e.g. 0.25 and final answer to 0 decimal places, e.g. 2,510.) Break-even point (b) Compute the break-even point in dollars under each of the alternative courses of action. (Round contribution margin ratio to 4 decimal places e.g. 0.2512 and final answers to 0 decimal places, e.g. 2,510.) Break-even point 1. Increase selling price 2. Change compensation 3. Purchase machinery Which course of action do you recommend?Explanation / Answer
ReqA: Sales In $ $1950,000 Variable cost $780,000 Sales in units 78,000 units Selling price per unit (1950,000/78,000) = $ 25 per unit Variable cost per unit (780,000 /78000) = $ 10 per unit Total fixed cost= $1010,000 Contribution per unit (Selling price - variable cost) = $ 15 per unit CM ratio = Contribution per unit / Selling price*100 ( 15/25 *100 ) = 60% Break even point in $ = Total Fixed cost / CM ratio ( 1010,000 /60 *100) = $ 1683,333 ReqB: Break even sales in Different Alternatives Alternative -1: Increase in Selling price by 30% Revised Selling price ( 25+30%) = $ 32.50 per unit Variable cost per unit $ 10 per unit Contribution per unit $ 22.50 per unit CM ratio (Contribution/Selling price *100) = 22.50/32.5 *100 = 69.23% Break even Sales in $ = 1010,000 /69.32 *100 = $ 1457,011 Alterntaive-2: Change in labour remuneration Revised variable cost per unit = 10+5% of Selling price =10+1.25 = 11.25 per unit Revised Fixed cost = 1010,000 +39000-201000 = $ 848,000 Contribution per unit (25-11.25 ) = $ 13.75 per unit CM ratio = ( 13.75/25 *100) = 55% Break even point in $ = Revised fixed cost / CM ratio ( 848,000 /55 *100) = $ 1541,818 Alernative-3: Cost proportion change to 50:50 Total cost: $ 1790,000 Variable cost = $ 895,000 ($ 1790,000 /2) ($ 11.47 per unit) Fixed cost = $ 895,000 ($ 1790,000/2) Revised ccontribution per unit ( 25-11.47) = $ 13.53 per unit CM ratio ( 13.53 /25 *100 ) = 54.12% Break even point in $ = (895,000 /54.12 *100) = $ 1653,732 Break Even sales Alternative -1 $1,457,011 Alternative -2 $1,541,818 Alternative -3 $1,653,732 As per break even point, Alternative-1 is better.